Billing by the hour is just one of many established customs within the legal profession. Why do we do it that way? I’ve always been amused by the answer to that question. Inevitably, the answer is, “because we’ve always done it that way.” End of discussion.
In the early 1980’s, when I first entered the legal profession, billing by the hour was well ingrained as the standard for all but a handful of practice areas. As a young associate in a large law firm, the thought never even occurred to me that attorneys could bill clients in any other form.
Now, of course, I know better. I am very familiar with the flaws of the hourly rate system. I suspect you are, too, since the legal blogosphere is full of posts on this topic. Instead, I’d like to talk a bit about how the profession got itself into this mess. Despite what people think, “we didn’t always do it that way.”
A century ago, lawyers rarely billed by the hour. Instead, they billed in a variety of different manners: fixed fees, retainers, estimated “value” and contingency fees. Ironically, these are many of the same methods being touted today as“alternative.”
As corporate America’s demand for legal services grew in scope and complexity in the 1960s and 1970s, it became more difficult to determine a fixed fee, a retainer or “value.” At the same time, it became more difficult for clients to understand exactly what they were purchasing.
Enter the “bill by the hour” method. Initially, time records were only one component used to determine final bills. However, by the end of the 1970s, time records became the only way to determine final bills. This change was welcomed by all. Lawyers liked it because it was easy to predict revenue and profits. Clients liked it because it was easy to comprehend what they were buying.
Even lawyers without much business sense were soon able to figure out that the more hours they billed, the more money they made. This gave rise to law firm minimum-billable-hour requirements. You know the rest. This created an incentive to spend more time than necessary on matters and, at times, to engage in fraud by “padding” hours.
Here’s a bit more history. Before billing by the hour became the standard, guess what the ABA considered to be a full year’s-worth of billable hours for a full-time attorney? In 1958, it was 1,300 hours. Those “good old days” were, in fact, pretty good!
The next time you and your colleagues are commiserating at happy hour about the tyranny of the hourly rate, remember this. We didn’t always do it that way. There are a wide range of attractive alternatives. Fifty years from now, perhaps the billable hour will be the exception rather than the rule.